January 09, 2013

Mark Thoma: What can Washington do to boost the U.S. economy?

[T]he nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low…. Monetary and fiscal policymakers could accelerate the return to full employment through tax cuts, increases in government spending -- particularly in areas that tend to create lots of jobs -- and further monetary easing. However, the ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government….

The long-run debt problem needs to be addressed, but the really large increase in the debt that has everyone so worried won't occur for many years. Meanwhile, as the experience in Europe has demonstrated, too much austerity too soon is counterproductive….

Monetary policy has been… too slow to react to the sluggish recovery… the Federal Reserve has not been aggressive enough when it has reacted. But the Fed has certainly been more aggressive and more responsive to the slow recovery than fiscal policymakers…

Many economists believe that both monetary and fiscal policymakers should do even more to help the economy recover. But practically that's not going to happen unless economic conditions change dramatically and unexpectedly for the worse. The best we can hope for is that fiscal policymakers do not begin serious deficit reduction too soon, that political standoffs over the deficit do not become economically disruptive, and that monetary policymakers do not increase interest rates or end quantitative easing until the economy is on firmer ground.

Comments

[T]he nation's most pressing economic problem remains the slow recovery, particularly the job market. Unemployment is still far too high and the rate at which we are creating new jobs is far too low…. Monetary and fiscal policymakers could accelerate the return to full employment through tax cuts, increases in government spending -- particularly in areas that tend to create lots of jobs -- and further monetary easing. However, the ability of monetary and fiscal policymakers to combat the slow recovery is constrained by three things: fear that aggressive monetary policy will drive up inflation to an unacceptable level; fear that tax cuts or increases in spending will worsen our long-run debt problem; and political disputes over taxes and the size and role of government….